UK inflation edged higher at the end of 2025 but the increase is being viewed as temporary and is unlikely to alter expectations for lower interest rates later this year – a key consideration for the short-term finance and bridging markets.
Data from the Office for National Statistics showed annual consumer price inflation rising to 3.4% in December, up from 3.2% in October.
The increase marked the first rise since July but was widely anticipated by economists and financial markets.
The move higher was driven largely by short-term, seasonal factors rather than underlying economic pressure. Air fares rose sharply over the festive period, while higher tobacco duty also pushed the headline rate up.
CORE CPI UNCHANGED
Crucially for lenders and investors, underlying inflation remained stable. Core CPI, which strips out volatile items such as energy, food, alcohol and tobacco, was unchanged at 3.2%, indicating that domestic price pressures continue to ease.
For the bridging and short-term lending community, the data supports the view that the Bank of England is nearing the point at which borrowing costs can begin to fall.
Markets continue to price in at least one cut in Bank Rate in the first half of 2026, with expectations underpinned by moderating wage growth and stabilising energy prices from April.
NOT UNEXPECTED
Nicolas Crittenden, associate economist at the National Institute of Economic Research, says: “This increase, the first since July 2025, was not unexpected.
“An increase in tobacco duty and airlines raising prices for festive travellers are the main drivers of this minor rise and does not indicate permanent price increases across the wider economy.
“Inflation is still expected to fall towards 2% this year due to weakening wage growth and energy prices stabilising from April onwards.
“The Bank of England will therefore not be worried by these numbers. We still predict one cut in Bank Rate in the first half of this year, provided renewed geopolitical tensions do not blow the current path of inflation off course.”
